Rachana RautraySenior Associate
Platforms facilitating payments between payers and beneficiaries may now be required to comply with the requirements of the Prevention of Money Laundering Act, 2002, and its rules
In a move likely to have a significant impact on the fintech industry, the Delhi High Court recently held that PayPal Payments Private Limited (PayPal) would be a 'payment system operator' (PSO) under the Prevention of Money Laundering Act, 2002 (PMLA). PayPal will be required to comply with the requirements applicable to a ‘reporting entity’ under the PMLA, specifically, the Prevention of Money Laundering (Maintenance of Records) Rules, 2005.
In its judgment, the Court agreed with the arguments presented by the Financial Intelligence Unit of India (FIU-IND) that despite PayPal's claims that it did not exercise control over remittance funds and was not classified as a ‘system provider’ (i.e., a PSO) under the Payment and Settlement Systems Act, 2007 (PSSA), it would still fall within the scope of the PMLA as a PSO (and by extension, a ‘reporting entity’), even though the definitions of ‘payment system’ under both the PSSA and PMLA are nearly identical. The Court reasoned that the scope of the term 'payment system' under both legislations was fundamentally different - the PSSA is concerned only with the regulation of entities that are “directly engaged in the handling of funds, entities which constitute a direct bridge between the customer and the beneficiary”, while the PMLA (given its wider ambit and intent to prevent crimes and offences) also includes “any system which assists, makes possible or advances the objective of a payment between a payer and a beneficiary.”
While this ruling has been appealed by PayPal before a Division Bench of the Court, fintech platforms that provide a system which enables the transfer of money “between two ends” may now be required to comply with know-your-customer requirements and anti-money laundering compliances under the PMLA.
The Reserve Bank of India introduces improvements to the United Payments Interface framework by increasing the upper limit for offline payments and facilitating transactions through pre-sanctioned credit lines
In a move that will likely bolster the Unified Payments Interface’s (UPI) features and increase its accessibility to more regions and audience groups in India, the Reserve Bank of India (RBI) has introduced two major improvements:
Increased upper limit for offline payments via UPI from INR 200 to INR 500
The transaction limits for offline transactions on UPI has been increased from INR 200 to INR 500. This is expected to promote the adoption of UPI Lite and enable an expansion in offline payments, especially in those areas with poor internet connectivity.
UPI linked transfers enabled for pre-sanctioned credit lines issued to customers by banks
Transfers to and from pre-sanctioned credit lines issued by scheduled commercial banks can now be linked to UPI, thereby allowing pre-approved credit to be used for effecting UPI payments. Previously, this could only be done if users linked their RuPay credit cards to a third-party application provider or payment system provider application.
These measures are reflective of RBI's initiative to introduce newer products/features to the UPI ecosystem, universalise access to credit, and ease payment processing in India.
Government releases the Financial Information Unit - India registration process for virtual digital asset service providers under the Prevention of Money Laundering Act, 2002
Pursuant to the central government notifying any entity carrying out certain activities pertaining to virtual currency, such as the transfer of virtual digital assets (VDA), as a 'reporting entity' under the PMLA, thereby subjecting it to certain obligations (to read our detailed update on this development, click here), the central government released guidelines in July 2023 to streamline the process of registration of such VDA service providers (VASP) with FIU-IND. This is expected to not only clarify the process of registration for VASPs but also help these entities comply with the requirements of the PMLA.
The registration guidelines require the following as part of the registration process:
- information on how the service provider's activities fall within the classification of a VASP, including information on its corporate structure;
- copies of Goods and Services Tax (GST) returns for the last three financial years and of GST registrations in all states it operates in;
- copies of income tax returns and other income tax forms;
- information on its arrangements with entities inside or outside India in relation to such activities;
- self-declaration that no proceedings have been initiated by law-enforcement agencies such as the Directorate of Enforcement, against the VASP or its directors or partners; and
- other information, as required.
The developments in this quarter, both legislative and judicial, continue the trend of the previous quarter to impose greater obligations on technology players and service providers, bolstering records of transactions, and bringing transparency in a sector that is often subject to dynamic changes and significant financial risk.
Simultaneously, there is a push from the RBI to empower Indian citizens and improve financial accessibility by expanding UPI capabilities. In line with the RBI’s Statement on Developmental and Regulatory Policies released in August, more technological developments can be expected, such as the implementation of artificial intelligence tools to facilitate conversational payments through UPI and a public tech platform to facilitate seamless digitally enabled credit flows, with a view to democratise the payments sector.